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Buy Dabur India Ltd For Target Rs. 620

Health, immunity, ayurveda trends to continue…

Dabur India (DIL) reported 25.3% revenue growth in Q4 on account of degrowth in the base quarter with lockdown imposed in the last 10 days of the March quarter. Domestic sales grew 30.3% whereas international business saw 19.4% revenue growth. India business volume growth was 25.4%. All categories saw robust growth. Health supplements (Chyawanprash, Honey) sales grew 17.7% despite it being off-season for the products. OTC & Ethical continued the growth momentum with 34% & 39.1% growth, respectively. Oral care grew 42.1% with red toothpaste gaining market share.

Similarly, hair oil, shampoos, Digestives also saw strong growth of 24.6%, 33.4% & 20%, respectively, largely on the back of increased out of home activity. Foods segment, which was significantly impacted in the corresponding quarter, saw 36.1% growth. With firm agri commodity prices & rising crude based derivative, gross margins increased 35 bps. We believe the company has taken select price increase to pass on rising commodity costs. Given 78 bps savings in overhead spends, 85 bps savings in employee spends & 126 bps increase in advertisement spends, the company was able to maintain its operating margins at 18.9%. Operating profit increased 25.6%. PAT was up 34% to | 377.3 crore on the back of strong growth in operating profit, stable taxation and higher other income.

Aggressive launches to drive growth

The company launched several new products last year to leverage the tailwinds of health, immunity & Ayurveda consumption tailwind. Further, it launched many products only on e-commerce channel as a pilot launch. The e-commerce channel has seen 100% growth in FY21 and is now contributing ~6% to the topline. We believe the second wave of the pandemic would further drive immunity boosting products, which would continue the growth momentum in health supplements, OTC & ethical portfolio. Further, we believe oral care category is witnessing a huge shift towards naturals & Ayurveda products. Hence, DIL would be able to gain significant market share in the medium term. We expect 11.7% CAGR revenue in FY21-23E.

Sustainable margins amid raw material cost pressure

The quarter has seen a sharp increase in crude based raw material, palm oil & other agri commodities. However, we believe DIL has the ability to pass on increasing raw material cost through judicious price hikes. Further, the company has been able to rationalise some cost in the last one year, which could be permanent cost savings. We expect a 90 bps improvement in operating margins to 21.8% in FY23E despite expected increase in advertisement spends.

Valuation & Outlook

DIL has been able to grow revenue by 10% in a challenging year. We believe health & immunity related tailwinds & related new product and increasing direct & rural distribution network (1.4 million outlets & 80000 villages) would help drive growth for the company. We expect 12.8% earnings CAGR in FY21-23E and maintain our BUY rating and TP of | 620/share.

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